Archive of UserLand's first discussion group, started October 5, 1998.
Re: Oil Gas Prices -- What's The Reason?
Author: Eric Soroos Posted: 3/17/2000; 2:11:28 PM Topic: Oil Gas Prices -- What's The Reason? Msg #: 15617 (In response to 15611) Prev/Next: 15616 / 15618
In addition to those three reasons, there are some other things that apply to the oil markets.1) Oil is not a very elastic item from an economic point of view.
There is a large demand that is relatively independant of the price of oil. For example, the difference in demand between a year ago at $1.20/gallon and now at $1.70/gallon is probably pretty small. It takes time for people to adapt their behavior to higher prices. Unless people are buying cars or changing their scommuting habits, they just pay more. That sort of change takes years. If the oil prices stay where they are, expect to see a reduction in the number of Ford Valdezs on the road after a few years. I mean, it's not like they could see the price of gas rising when oil was at 30 year inflation adjusted low prices.
2) There have been some west coast refinery issues. Some refineries went out of production last year, and there is an annual hit when they change the type of gasoline that they prodice.
The political aspects of not releasing the strategic reserves to put pressure on OPEC are puzzling.
Not really. Opec is it's own worst enemy. If supplies are tight, it spurs the development of new oil fields, like the deepwater sites in the Gulf of Mexico and the North Sea. But these fields are only viable if oil prices are in the $30 a barrel range. So if prices continue to rise, those sites suddenly become a viable option.
Right now, some of the major OPEC players are actually running near their capacity. One of the major players with excess capacity is Iraq. What are the possibilities that the US is going to invite Iraq to increase production? Somewhere between slim and none.
The Strategic Reserve is also a disincentive to the oil companies to have their own reserves to manipulate the price of oil. There's no point for them of having a reserve if the price is going to be managed by the government.
And finally, the US has the stated policy of being neutral on the price of oil. (And the followed practice of going to war to protect cheap oil, but I digress)
So in short, Oil prices are controlled by a combination of supply, demnd, politics and soccer moms driving SUVs. And people getting into something pretty deep, then not realizing that there's a mephistophlean bargain at the end of it, but wanting someone to bail them out.
eric
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